SBA standards: When size matters

Sizing up SBA's small-business size

In the North American Industry Classification System, 37 size standards apply to 1,151 industries and 13 sub-industry activities.

Thirty size standards are based on annual receipts, five are based on number of employees, and two are based on other measures.

For example, the engineering services industry has a $4 million annual revenue cap. A $21 million annual revenue cap applies to small businesses that provide services in custom computer programming, computer systems design, computer facilities management and other computer-related needs.

SBA's withdrawn proposal

Each industry would fall into one of 10 size standards based on number of employees. The standards range from 50 to 1,500 employees, depending on the industry. In addition, 31 industries would have an annual revenue cap with an employee-based size standard.

For example, engineering services would be allowed a maximum of 50 employees and $7 million in annual revenue.

Companies that provide custom computer programming, computer systems design, computer facilities management and other computer-related needs would be allowed a maximum of 150 employees and $30 million in annual revenue.

The Small Business Administration received thousands of comments about its proposed changes to small-business size standards. Gary Jackson, assistant administrator for size standards, said the agency remains committed to simplifying the rules.

Henrik G. de Gyor

Lloyd Chapman, president of the Microcomputer Industry Suppliers Association, said the group prompted 2,000 comments to SBA.

Frankie Frost

The Small Business Administration still plans to simplify its small-business size standards despite its recent decision to reassess changes it proposed in March. Thousands of public comments raised significant concerns about the planned changes and led SBA to pull back.

"We are still committed to trying to find ways to simplify the size standards to make them easier to use and understand," said Gary Jackson, SBA's assistant administrator for size standards.

Jackson said SBA will solicit comments on specific options for revising the size standards through an advanced notice of proposed rulemaking, which will be published in the Federal Register this summer. The agency also plans to hold hearings nationwide to discuss changes, Jackson said.

The size standards define what constitutes a small business for the purpose of federal government contracting. Companies that meet the standard in their industries can qualify for SBA loan programs, contracts set aside for small businesses and other federal business-development programs.

SBA earlier this year proposed shrinking the number of size standards from 37 to 10. All the standards would be based on number of employees. Currently, some size standards are based on annual revenue, and others are based on employee count.

Under SBA's proposal, some industries, including information technology, would get both an employee cap and a revenue cap. To be considered small, IT services companies could have no more than $30 million in annual revenue and no more than 150 employees.

After SBA began receiving large volumes of comments on the proposal, the agency in mid-May extended the deadline for comments to July 2, when SBA Administrator Hector Barreto withdrew the rule, saying further assessment was necessary before any changes could be made.

The agency has received about 4,500 comments on its proposal, including 800 since the proposed rule was withdrawn, Jackson said. At least half of the comments support a change in the size standard from 500 to 100 employees for non-manufacturing companies such as resellers, Jackson said.

However, about half of the comments oppose one or more parts of SBA's proposed rule, Jackson said. For example, many executives complained that the proposed 150-employee cap for IT firms would push small companies into large-business status well before they reached the $30 million revenue cap.

Those companies could no longer pursue small-business set-aside contracts nor accept work from large businesses seeking small-business subcontractors, executives said.

Several IT industry groups welcomed SBA's decision to step back temporarily from its rulemaking effort. The House and Senate Small Business Committees and SBA's watchdog Office of Advocacy also had objected to SBA's proposal.

Sen. Olympia Snowe (R-Maine), who leads the Senate Small Business and Entrepreneurship Committee, objected to the proposal because the new standards would reclassify 34,100 small businesses as large businesses.

But SBA said 35,200 businesses could gain small-business eligibility under the new standards, so the net effect would be an increase of 1,110 companies defined as small.

Still, jettisoning more than 34,000 small businesses from the federal marketplace would hurt not only those companies but also the large companies that team with those businesses to meet federal subcontracting goals for small businesses, said Harris Miller, president of the Information Technology Association of America, an Arlington, Va., trade group that opposed SBA's proposal.

Valerie Perlowitz, chairwoman of ITAA's Small Business Subcommittee, said she wasn't surprised SBA temporarily put its rulemaking effort on hold.

"SBA is doing the right thing by trying to streamline the size standards, but it is very difficult to figure out a good methodology when you are dealing with so many different industries," said Perlowitz, president and chief executive officer of Reliable Integration Services Inc., a small IT contractor in Vienna, Va.

That difficulty is why Giovanni Coratolo, director of small business policy at the Washington-based U.S. Chamber of Commerce, said he thinks SBA should revise only certain size standards if necessary, not all of them.

"All fiddling with the rules does is change long-standing standards by which small businesses entered into this [federal contracting] arena and developed strategies based on those rules," Coratolo said.

"I would like to see the rules stay the same, unless they can make a case why they should be changing a specific size standard. Simplicity is not a good reason."

Perlowitz, on the other hand, said she'd like to see SBA create a grandfather clause that would temporarily protect the small-business status of companies that would be pushed out of small-business programs as a result of a size-standard change. She said a grandfather clause would help companies that built their business plans around the current standards.

[IMGCAP(2)]At least one industry group was unhappy about SBA's delay. Lloyd Chapman, president of the Microcomputer Industry Suppliers Association in Petaluma, Calif., said his organization prompted 2,000 of the 4,500 comments to SBA.

Those 2,000 comments were form letters that supported a part of SBA's proposed rule that would have cut the non-manufacturer size standard from 500 to 100 employees.

"An overwhelming number of people were in favor of the change from 500 to 100. They were a representative sample of the American public," not just computer sellers, Chapman said.

Chapman's group represents small information technology suppliers. He said SBA's rule withdrawal shows that the agency is discounting his group's input.

Jackson disagreed.

"Multiple comments from an organization are a gauge of how strongly the members of the organization feel, but we also need to put that in context," he said. "You may have other organizations that represent a large membership that are taking a position most members support, but through one letter."

"The non-manufacturer size standard, in my opinion, needs to be reviewed and considered," Jackson said.

Chapman said he opposed most of SBA's proposal, other than the change to the non-manufacturer standard, but added: "They can do what they want to with all this other stuff. I don't care."

Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com.

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